How to Buy a Home With No Money Down

This article was co-authored by Ryan Baril. Ryan Baril is the Vice President of CAPITALPlus Mortgage. He graduated from the University of Central Florida in 2012 with a B.S.B.A. in Marketing.

There are 25 references cited in this article, which can be found at the bottom of the page.

Coming up with the down payment for a home can be a struggle. Mortgages are available, however, for prospective homeowners in all different income brackets, some offering down-payments as low as 3.5% of the value of the home. Figuring out what options are available to you is an important first step of home ownership.

Steps

Method One of Four:Applying for a Zero-Down Mortgage as Low Income Applicant

Gather the basic requirements for a Federal Housing Authority (FHA) Loan. Before applying for an FHA-insured home loan, you must gather all of the documents that you will need in order to submit an application. You will need the following information:

Proof and address of your place of residence for the previous two years.

Social Security numbers of those applying for the loan.

Employment history, including the name and address of your employer for the previous two years.

Proof of income, including your gross monthly salary, W-2 forms, pay stubs, and tax returns for the previous two years.

Information regarding all checking and savings accounts.

Information regarding any real estate that you own.

Loan history, if applicable.

If you are a veteran, have your Certificate of Eligibility or DD-214.[1]

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Contact an FHA-approved lender. The FHA does not loan money directly to potential home owners. Rather, it has a list of approved lenders that make loans through FHA-insurance programs.[2] After gathering all of the required loan information, your next step is to contact an FHA-approved lender and discuss potential mortgage terms. You can find a list of FHA-approved lenders here: http://www.hud.gov/ll/code/llslcrit.cfm.

Discuss the ways that you can purchase a home for little to no money down. The lender should be able to tell you the amount that you can finance through a mortgage.

Technically, the FHA does not offer a no-money down loan. However, you can get a loan with a down-payment as low as 3.5% of the purchase price of the home.[3]

If you qualify for an FHA-insured mortgage, you can determine whether you also qualify for down payment support from your state or other lenders (discussed below). If you qualify, you can purchase a house without having to put any money down.

Seek a pre-approved mortgage. While you are not required to seek pre-approval, the FHA recommends that you take this step in order to find out early in the process whether you will qualify for a mortgage and how much the lender is willing to let you borrow. You should discuss a pre-approved mortgage with the FHA-approved lender and ask them about what steps you must take.[4]

Complete a Uniform Residential Loan Application. This application starts the mortgage approval process. You may be asked to complete this form if you seek pre-approval but you will be required to complete the form during the mortgage process and usually after you have identified a house that you want to purchase.

You will need to provide much of the information that you already gathered such as employer information, income sources and amounts, debts, housing expenses, and the appraisal of the new property, if you identified a home to purchase.[5]

Seek an underwriting and document review. Once you have completed your paperwork and chosen a home to purchase, you submit all of your documents for review. The lender will examine your paperwork and determine whether your information supports making a loan that they believe will be repaid.

During the process, you may be asked to give a more detailed explanation of certain aspects of your income, expenses or debt. This is a fairly routine request and often only requires a short letter of explanation that responds to the lender’s questions.

If the lender finds serious concerns about your ability to pay for the loan, you may not qualify for mortgage through this FHA program.

If your loan makes it through the underwriting process, there is a good chance your loan will be approved.[6]

Receive loan approval. If the underwriter believes that you meet all of the lender’s guidelines and the FHA’s guidelines, you will be approved for financing of your home, also known as a mortgage. If your offer or bid on a home has been accepted, you can move towards closing on your new home.[7]

Determine whether you qualify for down payment assistance in your state. If you are unable to afford the 3.5% down payment on your home, you can seek down payment assistance through state programs, sometimes referred to as secondary financing assistance. You can locate agencies or nonprofits that offer secondary financing assistance in the following places:

Determine if you qualify for a Veteran’s Administration (VA) loan. The VA provides home loan guaranty benefit to assist military service members, veterans, and eligible surviving spouses become homeowners. The VA has a list of qualifying requirements for the loan program based on your time of service, whether you served in a war, and related to your spouse’s service if you are a surviving spouse of a veteran. You can review the list of service requirements here: http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp.

If you are in the National Reserve, you will need to have served for at least six years to qualify for this.

Gather documents for a Certificate of Eligibility. In order to apply for a VA-backed loan you must provide proof that you are eligible for the program. Depending on your service and whether you are currently in the military, you must provide the following proof:

Military veterans and current or former National Guard or Reserve members who have been activated for federal active service must provide DD Form 214, which shows the character of service and the reason you left the military.

Active Duty Service members and current National Guard or Reserve members who have never been activated for Federal active service must provide a current statement of service that is signed by the adjutant, personnel office, or commander of the unit or higher headquarters. This statement must include: the service member’s full name; social security number; date of birth; entry date on active duty; the duration of any lost time; and the name of the command providing the information.

Discharged members of the National Guard who have never been activated for Federal active service must provide NGB Form 22—Report of Separation and Record of Service—for each period of National Guard service, or NGB Form 23—Retirement Points Accounting, and proof of the character of service.

Discharged members of the Selected Reserve who have never been activated for Federal active service must provide a copy of their latest annual retirement points statement and evidence of honorable.

Find a mortgage lender. Since the VA does not lend money itself, you need to locate a lender that works with VA loans. Once the lender confirms that they work with VA loans, consider the following in evaluating the lender:

Get offers from several lenders and see who is offering you the best interest rates.

Compare the best rates as given by each lender. The Consumer Financial Protection Bureau requires that all lenders give their best rate up front.

Check whether the lender is offering you a mortgage rate that is competitive to mortgage rates that people of similar credit ratings are receiving. You can see a breakdown of mortgage rates by credit score here. If you don't know what your credit score is, you can use free online services. Just make sure that you use one that will check your FICO score.

Ask all of the lenders to explain all of the closing costs, fees and any other expenses associated with the loan so you can understand and compare the true costs of each loan.[10]

Apply for a home loan. Your lender will provide you with all of the paperwork that you need to apply for the home loan as well as a checklist of any documents or information that you must provide with the application. If you went through the preapproval process, you may have already submitted some of the required documentation but there will be a much closer examination of your finances before a loan is finally approved.

You will need your DD214: Proof of Military Service form, and a prospective property.

Remember: all veterans who meet the criteria are eligible for the loan, but that does not mean that you will necessarily qualify for the loan that you seek.

The VA guarantees a loan of 25% of an amount up to $104,250, generally the list price of the home, plus the funding fee, which limits the maximum loan to $417,000.

Because there is no down payment involved, this will be a Guaranteed Loan, which means that the lender is protected against failure to pay.[11]

Seek preapproval for your loan. By choosing to get prequalified for your VA loan, you can determine whether you will qualify for a loan and the amount you will qualify. Once preapproved, you can begin looking at properties and begin the home purchasing process. Generally, to become preapproved for a VA loan, lenders will examine your income, debt, expenses and other factors to determine whether they believe you will be able to repay a loan and the amount of the loan you can afford to repay.
[12]

The lender will calculate your Debt-to-Income Ratio, which is the amount of debt you hold compared to the amount of money you make. The maximum ratio to qualify is 41%. In the event the number exceeds the 41%, the VA has a residual income guideline which can allow approval, yet are not considered a compensating factor.[13]

Decide if leasing with an option to buy is right for you. This is another way to potentially purchase a house with little or no money down. Also known as an option or "rent to own," this is an opportunity for you to rent a home you eventually plan to purchase, with a percentage of the rent paid going toward a down payment on the property.[14]

The rent on an optioned house is going to be above market (because you are also paying toward the down payment), so it may not be worth it to enter this arrangement unless you have your heart set on that particular house.[15]

Find an owner who is willing to option her house. People who have struggled to sell their home and are motivated may be more open to this arrangement.[16] Keep an eye out for a house that has been on the market for a long time.

Know the risks. While this can be a great arrangement for some, it is not for everyone. Be aware that there are risks involved with renting to buy, namely that, should you choose not to purchase the home, you will not get back any of the option money back, losing whatever you paid toward the down payment. It does mean that, should you change your mind, you are under no obligation to buy the house at the end of the lease.[17]

Make sure you have the home inspected before signing the lease or, at the very least, before buying the house. An appraisal will ensure you are paying a fair price for the home and you'll also find out if the house needs any major repairs. If there is major work to be done, it might be best not to enter into such an agreement, since the repairs may cost you quite a bit.[18]

Make sure you have agreed who will be responsible if anything happens to the house while you are leasing.[19]

Negotiate a contract. You will need a standard lease agreement, plus an option to purchase.[20] Because the title to the house remains with the original owner until the house is actually purchased, you will need a lease agreement as you would with any tenant/landlord situation. In addition, the option to purchase will grant the tenant the option to purchase the house after a predetermined amount of time.[21] This includes the option fee, which is either paid upfront or as the higher-than-market rent.[22] Both parties should have a lawyer review the contracts and make sure the following is established:[23]

Length of the lease period

Rent amount

Percentage of rent going toward down payment and how it will be held (usually in escrow)

What will happen if the renter decides not to buy at the end of the lease period (usually the renter loses the option money)

Who will pay for repairs, utilities, etc. (usually the tenant)

Who will pay property taxes, insurance and homeowner fees

What happens if the home value rises or falls between the time you sign the agreement and the end of the lease

Understand the FHA foreclosure process. When a person stops paying their FHA-guaranteed mortgage, the FHA may start the foreclosure process, which means that since the buyer can no longer make payments, the FHA will sell the home to pay off the mortgage of the defaulting buyer.[24] Individuals can sometimes purchase FHA foreclosures, for little to no-money down.[25]

Research foreclosure homes available in your state. The FHA as part of HUD provides a website where homeowners can search for HUD properties for sale. You can search for these properties here: http://hudhomestore.com/HudHome/Index.aspx.

Non-government websites also allow you to search for FHA foreclosures. You can locate these websites by conducting an internet search for “FHA foreclosure properties.”

If possible, you will want to determine the reason for the foreclosure. The fact that the home was foreclosed upon may mean there is something structurally wrong with the house that you will need to get fixed as soon as possible. It may also mean the home was owned by someone who got locked into a high-interest loan they could not afford and ended up defaulting. It will be your burden to determine this.

Decide how much work you want to put into your house. Depending on the reason for foreclosure, these homes may be what you might call “fixer-uppers” or simply be move-in ready homes that someone could no longer afford. Before purchasing a foreclosed home, you should understand the terminology of foreclosure so that you better understand what type of property you may be purchasing.

Insured (IN) homes are homes that have been foreclosed upon, but meet the Minimum Property Standards (MPS). This means that they have been evaluated by a home inspector, who has “passed” the home.

Insured with Escrow (IE) homes require some measure of repair to meet the MPS. This means that the home may have some pressing structural, heating, or plumbing deficiencies that will need taken care of in the short term. The problems are not such that the house is uninhabitable, but significant enough to affect the value of the home.

Uninsured (UI) homes do not meet MPS. This means that the home requires structural, heating, or plumbing repair before it can be inhabited.

People who undertake the project of a foreclosed home are may be DIY-types who enjoy the challenging of fixing up a property acquired on the cheap. If you are not excited about the idea of gutting a house and installing a new septic system (or paying to have this done), this might not be the option for you.

Have the home inspected. Before purchasing the home, you need to fully understand the condition of the home and the amount of work and money you will need to invest so that the home is livable. You should hire a home inspector who can evaluate the home, determine any significant structural problems and establish how much it will cost to repair.

While homes that need substantial work are technically not available for “no money down” mortgages, if the home meets a certain threshold for repairs, you may be able to qualify for an FHA rehabilitation loan.

You should keep in mind that purchasing a foreclosed property that needs a lot of work may not be the best option, particularly if the sum for the repairs exceeds the purchase price of the home, essentially resulting in a “zero money down” payment after the fact.

Tips

You should seriously considering working with professionals such as real estate agents, real estate attorneys, and property appraisers during this process. They will make sure you are getting the best deal that you can. Hiring professionals will also help reduce some of the risks associated with buying a home.

Warnings

Beware of predatory lending. The only no money down options available involve either extraordinarily high interest rates or monthly payments, which are dangerous to get locked into. Consult your financial advisor before entering into any “too good to be true” loans.

To buy a home with no money down as a low income applicant, start by applying for a Federal Housing Authority loan through an FHA-approved lender. Next, start the mortgage approval process by completing a Uniform Residential Loan Application with information such as your employer, income sources, debts, and housing expenses. Then, submit your paperwork to your lender for an underwriting and document review. Once your mortgage is approved, move onto completing the sales transaction for your new home.